Property stocks plunge amid global rout
It’s heavy weather for listed property stocks as bond yields jump. Photo: Nick Moir

Property stocks plunge amid global rout

Australia’s top property stocks plunged 3.26 per cent on Tuesday – in line with the broader market rout locally and globally – after the US reported higher-than-expected inflation, sparking concerns of steeper rate rises.

Yields on 10-year Australian bonds passed 4 per cent during the day, jumping about 30 basis points, before easing slightly to 3.96 per cent, the highest they’ve been in eight years.

Bond yields are a key guide to valuations for real estate investment trusts (REITs) – the owners of Australia’s office towers, shopping malls, warehouses and housing developments.

Real estate, along with utilities and infrastructure, is typically treated as a bond proxy, delivering a similarly defensive, albeit higher, yield than those from risk-free Treasury notes.

Among the hardest hit on Tuesday were childcare centre landlord Arena REIT, which plunged 6.05 per cent, and National Storage REIT which fell 5.29 per cent.

Fund manager Charter Hall fell almost 5 per cent, while Brisbane-based Cromwell Property Group dropped 4.76 per cent.

Performing comparatively better were diversified developers Mirvac and Stockland, down 0.49 per cent and 0.55 per cent respectively, and shopping mall owner Vicinity, which fell 2.2 per cent.

SG Hiscock portfolio manager Grant Berry said the sharp rise in bond yields would put pressure on valuation metrics for the REITs “if there was no commensurate growth”.

“The themes that were apparent earlier this year are playing out even more strongly: groups that were trading on higher multiples have de-rated the most; groups involved in development and construction have been more exposed in the sell-off,” he told The Australian Financial Review.

“Groups that have their debt position well-placed, with low gearing and are well-hedged, have performed better.

“Notwithstanding the rise in real bond yields, some property stocks are starting to look pretty attractive. We consider this in the context of implied capitalisation rates based on current security prices.

“Inflation expectations are clearly rising, so within the AREIT sector you want to have exposure to assets that are best-positioned for inflation.

“That is, assets that are already built, rather than being built; assets that don’t necessarily have long leases with fixed increases at low rates. We have an aversion to high multiple growth entities, a preference for lower gearing and, ideally, to those with a higher proportion of their debt hedged.”

While US inflation data sparked the global sell-off, local property stocks have been weighed down for much of this year on expectations of rising interest rates and higher bond yields.

Last week, Jefferies analysts led by Sholto Maconochie, served a fresh warning on the risks posed to the REIT sector from increased borrowing costs, cost-of-living pressures and the negative housing wealth effect from house prices falling.

Capitalisation rates, or cap rates – an industry metric akin to an investment yield whose rise points to falling asset values – were likely to expand in 2023, according to Jefferies.

“With rising rates and funding costs, we see risk to the sector from cap rate expansion, increased gearing and declining consumer sentiment impacting resi/retail and office if unemployment rises,” the analysts wrote in a client note.

“The sector trades at a discount to NTA (net tangible assets) and has priced in asset declines, but we think consensus EPS estimates are too high and reduce earnings across our coverage.

“Our preference is for quality with low gearing, high hedging and market rental growth.”